Collection on Your Delinquent Account Using a Repayment Agreement

By Scott Blakeley, Esq.

However, in a recessionary economy, credit professionals cannot merely cut off credit when a customer fails to honor its credit terms. The focus is no longer merely collection alternatives, as a substitute customer can be found in a robust economy. Rather, you must evaluate, with the assistance of sales and management, credit risk for future sales even where a customer has past due invoices.

In this recessionary setting, you must create the documents that create the greatest leverage for payment on the delinquent account and minimize any later disputes as to balance owing, pay down and payment method. Rescheduling the past due invoices into a formal repayment agreement may be an essential document for the credit professional for payment of past due invoices and the expectation for future sales in a recessionary economy.

A. The Repayment Agreement and Due Diligence

In assessing the prospects of a repayment agreement as a method to cure the delinquent account, as opposed to litigation alternatives, the vendor must determine the customer's willingness, ability, and trustworthiness to pay on the past due balance, and its future need for the product or service. Has the customer sought out a competitor of yours to replace your company? Has the customer become untrustworthy, for example, by placing an unusually large order and in hindsight, you've learned it does not have the cash flow to pay?

One way to determine if a customer may commit to a repayment agreement and has the financial wherewithal to repay the debt is to request financial projections. If the customer is a privately held business and takes the position that financial information is not shared, you can offer a confidentiality agreement to overcome the resistance. If the customer still refuses to share the information, this may be a red flag that the customer cannot honor a repayment agreement.

You may also gather facts about the customer's financial standing, including assessing future sales as part of the repayment agreement, through third party comment, including salesperson visits to the account, contacting the customer's bank, which was given as part of the credit application process as part of the repayment agreement, talk to industry group members, other vendors, and the landlord about their past experience with the customer. The Internet can also serve as a search tool to determine the availability and sufficiency of security should you insist that the repayment agreement be secured, as well as an asset and UCC search, including real estate search.

You should also confirm whether other creditors, including the debtor's landlord, have initiated collection actions against the debtor. Many state and federal courts now have electronic dockets where you can confirm whether lawsuits have been filed in the debtor's home venue. The importance of learning whether other creditors are being paid and, if not, what steps they are taking, is tied to whether you have the luxury to work with the debtor to have the delinquent account paid over time.

In some settings, certain creditors may be rushing to the court house to force payment on their delinquent accounts which forces you to reassess the repayment agreement strategy. With the framework of alternatives to a repayment agreement, you must also consider the debtor's insolvency or bankruptcy risk. If the debtor files bankruptcy the automatic stay arises, which bars the vendor from collecting on the unsecured past due balance, including beginning or continuing lawsuits, collection calls, repossession, foreclosures, garnishments or levies.

The automatic stay remains in effect until the bankruptcy judge lifts the stay at the request of a creditor, the debtor obtains a discharge, and/or the item of property no longer remains part of the debtor's bankruptcy estate.

As vendor, you must also consider the impact of a bankruptcy preference, with strategies to collect on the delinquent account. A preference is a payment made by the debtor to a creditor within a defined period of time, prior to the debtor's bankruptcy filing. Because a preference gives the creditor who received the payment an advantage over other creditors in the bankruptcy case, the trustee can recover the preference (the amount of the payment) and distribute it among all of the creditors.

B. The Repayment Agreement in Action

Repayment agreements are a product of negotiation. The vendor seeks to include as many terms that create the leverage that the debtor will focus on honoring the repayment agreement. Some of the terms for the vendor to consider in a repayment agreement are:

Fixing the Indebtedness

In an active trade relationship, where the vendor offers trade concessions to make sales and where the customer may take deductions, unauthorized and otherwise, the amount owing the vendor may be disputed. The debtor may also dispute the debt through claims such as defective product or late deliveries. Should the vendor sue to collect the delinquent account, the vendor may be surprised to find it the target of a counterclaim lawsuit by the customer. Given the uncertainty of the amount of the debt with some customers, you may use the repayment agreement as a way to eliminate this kind of risk.

A repayment agreement should fix the amount owed, including fixing the amount of customer concessions and disputes. By fixing the amount owed, you eliminate later disputes that may arise as to application of payments and concessions. Fixing the indebtedness can be helpful should the debtor fail to honor the terms of the repayment agreement and the vendor seeks to enforce the debt.

Fixing Repayment Schedule

The repayment agreement should provide a fixed schedule for repayment of the debt. The repayment schedule may be on a monthly basis. The benefit of a fixed schedule allows you a clear timetable for repayment of the delinquent account rather than a mere understanding that the debtor will pay the amount owing when the debtor has free cash. This can be important where a debtor files bankruptcy and you received payment within the 90 days prior to the bankruptcy filing

Discounting the Face Amount of Invoices

A repayment agreement requires the debtor's consent, and therefore may result in heated negotiations. Such issues as the term of the repayment agreement, the balance owing, additional credit sales, security, a guaranty, balanced with collection alternatives are considered by the vendor.

There may be instances where a vendor agrees to discount the face amount of the past due invoices to reach a compromise, say 10% or 15%. The repayment agreement may provide that in the event of a default by the debtor, the face value of the past due invoices become due and payable — the debtor loses the discount. An exception may be where the debtor defaults on the repayment agreement near its end. Should the vendor seek to enforce the face value of the invoices, a court may find such provision unenforceable.

Waiver of Counter Claims and Disputes

The repayment agreement protects you from challenges later brought by the customer that an amount owing is in dispute, that the product or service provided is defective, or that the documentation supporting the debt is incorrect. By waiving all defenses, the debtor allows you to promptly proceed to judgment should the debtor default on the repayment agreement.

Taking Collateral

Another method to have your customer focus on honoring the repayment agreement is to insist on collateral to back up the repayment agreement. This can take the form of the debtor granting a junior security interest in all of the its assets. Whether the debtor will grant such an interest will depend on the its's existing lender's consent, as well as their perception of other vendors' reaction to granting a security interest.

Clean Up Documents

There may be times when a customer refuses to sign your initial credit application, or, in the rush for an initial sale, a credit application is never taken. In these settings, you may find its documentation is not in order: perhaps a mislabeled invoice of who the customer is, or the kind of business organization the vendor has sold to. Should a dispute with the debtor arise, or invoices otherwise go unpaid, you may find needless defenses raised by the debtor as to the documentation, which may slow payment on the account.

A repayment agreement may also help you from the surprise of finding new owners of the debtor. Without the repayment agreement, the debtor's new owners may dispute their liability with the existing documentation. Depending on the duration of the repayment agreement, you may include a notice requirement that the owners must notify you in writing of any change in ownership, name, or business structure under which the credit is established.

In addition, if, as part of the initial account evaluation, you have taken collateral such as a purchase money security interest or junior security interest in the debtor's assets, or have a consignment agreement, you must comply with Article 9 of the Uniform Commercial Code. If you have failed to have properly comply, you may find your security interest or consignment agreement subject to challenge. A repayment agreement can also be used to clean up what otherwise may be improperly perfected security interests or consignment agreements.


To back up the repayment agreement, you may insist that the debtor's principal of a closely held corporation or limited liability corporation personally guarantee the past due debt as well as any future sales on credit. The personal guarantee is an inducement by the vendor not to take any creditor collection action, and, perhaps afford continued sales. If the debtor is part of a family of companies, the vendor may seek a cross corporate guarantee.

Preference Defense

Although the customer may enter into the repayment agreement and honor the payment terms of the repayment agreement with the vendor or class of vendors, the debtor may still be forced into bankruptcy.

As vendor, you do not want to negotiate a repayment agreement and forebear on more immediate collection alternatives, only to find some or all of those payments clawed back by a trustee. A vendor that chooses the litigation alternative to collect on the past due invoices has a preference risk if the vendor levies on a debtor's accounts or records a lien against the debtor's property within 90 days of the preference filing. Thus, a question you have to ask is whether payments received under the repayment agreement during the 90 days prior to the bankruptcy filing are a preference.

Your defense to a preference demand is that the repayment agreement has replaced the delinquent invoices. Therefore, if the debtor paid according to the terms of the repayment agreement, you may contend that such payment was made in the ordinary course of business under section 547(c) of the Bankruptcy Code and conformed with the repayment agreement, not past due invoices.

Favored Vendor Clause

If you commit to take payment on the delinquent account over time, and perhaps discounts your invoices, you do not want a surprise that the debtor has entered repayment agreements with other creditors with comparable balances or that treat you less favorably. Therefore, the repayment agreement should provide that if the debtor favors another creditor, that constitute a default.

Fees and Costs

The repayment agreement should include an attorney's fees provision, as well as late fees and default interest should you be required to enforce the defaulted repayment agreement.


If the debtor is out-of-state, or out-ofcountry, the repayment agreement should provide that venue favors the vendor in the event of enforcing the defaulted repayment agreement.


You patience in agreeing to take payment over time should not be rewarded with the debtor repeatedly paying late under the repayment schedule. To that end, to encourage the debtor to honor the repayment schedule, say payment is due the first of each month for the next six months, the debtor should face a finance charge or late fee for the first late payment. However, if the debtor pays late a second time that may result in a default that is not curable and you can obtain a judgment for the balance owing.

Acceleration Clause

Should the debtor fail to pay, the repayment agreement should provide that the entire balance owing under the repayment agreement is due.

Stipulated Judgment

A stipulated judgment is a judgment where the debtor and vendor have agreed to a judgment in the event of the debtor's default. If the repayment agreement is not followed, the vendor can file an affidavit of default where the judgment can be entered. Enforcement of the judgment can take many forms, but can include property liens and levies.

Confession of Judgment

A confession of judgment provides that the debtor admits liability and agrees on the amount of debt that must be paid to the vendor. A confession of judgment may be filed as a court judgment against the debtor who does not honor the repayment agreement.

The confession of judgment provision attempts to minimize the need to resort to legal proceedings to resolve the delinquent account. The enforcement of a confession of judgment depends on state law. Some states may not allow, while others give protections to the debtor by requiring that the must obtain consent from the debtor's counsel to be enforceable.

Continued Credit Terms

In a recession, revenues continue to be essential for the vendor, especially as sales orders from financially sound customers are harder to come by. Likewise, for the debtor that is struggling to keep its supply sources providing terms, it will often insist that the repayment agreement provide the vendor commit to terms for the duration of the repayment agreement. This is a call for credit, sales and management. Of course, as credit professional, you will need to provide a written opinion of the credit risk of future sales, compounded with the debtor repaying on the past due balance. This puts the credit professional in the role of customer relationship builder.

Credit Policy and SOX Compliance

In a recession, a best practice for a credit department is to document past due invoices that will be paid over time with a repayment agreement. Those vendors that are publicly traded and SOX compliant may have their auditors insist on repayment agreements as part of their internal controls and procedures. The repayment agreement may provide a more accurate recording of the collectability of the past due balance, and therefore financial reporting.

C. Repayment Agreement Alternatives

A repayment agreement requires the debtor's consent. If the debtor refuses to agree to a repayment agreement, the litigation alternative needs to be considered. You may file suit for breach of contract, coupled with a prejudgment remedy such as a writ of attachment. This collection action may force the debtor into a repayment agreement in hopes of avoiding the suit. If the debtor does consent in this setting, you should add the collection costs and interest to the past due balance.

If you have an arbitration provision in your credit application or supply contract, you may invoke this when the debtor refuses under the repayment agreement to deal with the past due invoices. As with collection suit alternative, the debtor may respond to the arbitration demand by consenting to the repayment agreement. The collection costs should be added to the past due balance.

D. Repayment Agreements in a Recession

Many long standing customers that have been a significant source of business for vendors may find themselves in financial difficulty as a result of the downturn in the economy. These are customers that have a good faith intention of working out their short term financial difficulties. In these settings, a vendor may be better served to work with the customer, but have a more formal commitment as to dealing with the dealing the delinquent account, such as a repayment agreement.

The above article originally appeared in the Winter 2008 issue of Blakeley & Blakeley's Trade Credit Quarterly. 

3 Replies to “Collection on Your Delinquent Account Using a Repayment Agreement”

  1. Again, Scott Blakeley provides some excellent content that Credit Managers can use in the day to day world. I alway look forward to reading Scott’s articles.

Leave a Reply

Your email address will not be published. Required fields are marked *